Choosing a Damages Methodology for Certain Construction Claims

April 17, 2018 Choosing a Damages Methodology for Certain Construction Claims

In any construction dispute resolution process, not only does a claimant have to prove liability of the other party, but the claimant must also prove damages to prevail on its claim. The proof of damages element to prevailing on a claim is often overlooked and its importance can be underestimated. Many times a claimant will focus its case on the facts supporting entitlement, but fail to take the time to meet all requirements establishing a particular damages claim. While a jury may be more forgiving of such an approach, a court on a bench trial or an experienced construction arbitrator may not be so forgiving.

A common example of a construction claim requiring specific elements of proof occurs when a party seeks recovery of extended, or unabsorbed, home office overhead costs for a delay claim. Delays are common in the construction industry and will impact home office overhead costs. Extended home office overhead costs can include management salaries, administrative staff salaries, rent, supplies, home office equipment, and insurance, among others. Construction delay claims are regarded as being among the most difficult types of claims in the industry and often times require the engagement of an expert. This can be due in large part to the difficulty in analyzing the home office overhead costs associated with a specific project in conjunction with the percentage of the total amount of these costs for the company. Typically, home office overhead costs are not directly allocable to a specific construction project. As a result, it is important for a contractor to select a recognized methodology for calculating allocable home office overhead costs and ensure all elements tied to such damages methodology are satisfied.

A common methodology for determining the extended home office overhead attributable to a specific project delay is the Eichleay Formula. The Eichleay Formula’s foundation is in the government contracting arena and more specifically in the Armed Services Board of Contract Appeals case, Eichleay Corporation, ASBCA No. 5183, 60-2 BCA 2688. The methodology can be summarized as requiring the following steps to prove an extended home office overheard claim:

(Total billings for the contract/Total billing for the Company during the original contract period) X Company Total Overhead During Contract Period = Home Office Overhead Allocable to the Contract.

(Overhead Allocable to the Contract)/(Days of Contract Performance) = Daily Home Office Overhead Rate

(Daily Contract Overhead Rate) X (Days of Compensable Delay) = Recoverable Home Office Overhead

In doing this calculation, there are certain other legal thresholds that may be required in order to prove the claim. For example, in Ohio, these elements include (1) proof that the contractor was on standby; and (2) the contractor must prove that it was unable to take on other work while on standby. The Court of Appeals of Ohio recently addressed whether these elements must be met on a claim for extended home office overhead costs, using a slight variation of the Eichleay Formula, in Wood Electric, Inc. v. Ohio Facilities Construction Commission, 90 N.E.3d 371 (10^th Dist. 2017).

In Wood Electric, Inc., an electrical contractor on a multi-prime school construction project run by a construction manager brought suit against the Ohio Facilities Construction Commission (“Owner”). Among other issues in dispute were the damages suffered by the electrical contractor as a result of delays in the construction allegedly caused by the Owner and other contractors. The electrical contractor sought a claim for extended home office overhead and, instead of using the Eichleay Formula, it used a variant called the HOOP formula. The HOOP formula is a methodology adopted by the Ohio Department of Transportation, and essentially involved the use of elements two and three of the Eichleay Formula. Thus, it was a similar, but not identical methodology. The electrical subcontractor prevailed on this claim in the Court of Claims, but the Owner appealed arguing that the trial court’s decision was contrary to Ohio Supreme Court precedent requiring a prima facie showing of two elements for a home office overhead claim: (1) the contractor was on standby; and (2) the contractor was unable to take on work while on standby. Id. at 379-380 (citing Complete Gen. Constr. Co. v. Ohio Dept. of Transp., 760 N.E.2d 264 (Oh. 2002). Specifically, the Owner argued that the electrical contractor was not entitled to recovery on this claim because it failed to establish these two additional elements.

In evaluating this argument, the Court of Appeals stated that the electrical contractor never sought to use the Eichleay Formula, but instead expressly relied on the ODOT adopted HOOP formula. The Court noted that the parties’ contract neither forbade the HOOP formula nor mandated the use of the Eichleay Formula. Further, and importantly, the Court noted that Complete Gen. Constr. Co. expressly stated that “we do not find that the Eichleay Formula is the exclusive manner of determining unabsorbed home office overhead.” Id. at 381 (citing the similar case J&H Reinforcing & Structural Erectors, Inc. v. Ohio School Facilities Comm., 2013 WL 4779008 (Ohio 2013). Because the Court concluded that the two elements of prima facie proof do not necessarily apply to other formulas for calculations of home office and adhered to the recent J&H ruling, the Court of Appeals concluded that the trial court did not err in failing to require proof of the Complete Gen. Constr. Co. elements. Based on this ruling, and there are other factors that may come into play, it appears contractors – at least in Ohio – seeking extended home office overhead claims may want to consider using a formula other than Eichleay to potentially lessen their burden in proving such a claim.

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April 17, 2018 Choosing a Damages Methodology for Certain Construction Claims

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